FOREX: Dollar May Resume Gains as Traders Unwind Fed QE Bets

Key Overnight Developments

• Yen Little Changed as Bank of Japan Details Asset-Buying Plan
• New Zealand Dollar Moves Higher After RBNZ Rate Decision
• Euro, British Pound Rise as Markets Digest US Dollar Rebound

Critical Levels

The Euro and the British Pound corrected higher overnight, adding 0.4 and 0.3 percent respectively against the US Dollar as markets digested the greenback’s sharp advance in yesterday’s trade. We remain flat EURUSD and GBPUSD.

Asia Session Highlights

The Bank of Japan voted unanimously to keep benchmark borrowing costs unchanged, targeting the 0.0-0.1 percent range set at the last policy meeting, as well as maintained its credit-loan program static at 30 billion yen. However, the bank did offer more details on the 5 trillion yen asset-purchase program unveiled earlier this month.

Policymakers will allocate 1.5 trillion to government bonds with maturities of 1-2 years, 450 billion yen to ETFs, 500 billion each to commercial paper (A-2 rating) and corporate bonds (BBB rating), and 50 billion to J-REITs (Japanese real estate investment trusts). They added that the aim was to complete ETF and J-REIT purchases by the end of 2011.

The Japanese Yen tracked modestly lower following the outcome, down 0.1 percent against a trade-weighted basket of its major counterparts. The muted response seems reasonable considering policymakers did not offer any changes to the existing monetary policy mix, merely providing more color on the latest bit of stimulus to be undertaken.

Related Article: New Zealand Dollar Moves Higher After RBNZ Rate Decision

Euro Session: What to Expect

The economic calendar looks fairly tame in European hours. UK House Prices are expected to decline 0.3 percent in October according to a report from the Nationwide Building Society, reversing September’s advance that had snapped a two-month losing streak. A gauge of Euro Zone Consumer Confidence is expected to be confirmed at -11 in October, matching the high reached in August for the second consecutive month and hinting sentiment may have topped out (although confirmation remains elusive until further data is available). Finally, the UK CBI Reported Sales survey is expected to show that retailers reporting an increase in activity from the previous year are expected to outnumber those reporting a decline by 35 percent in October, erasing September’s improvement to 49 percent.

On balance, risk sentiment may prove to be the dominant driver of price action once again as markets continue to size up what a second round of quantitative easing from the Federal Reserve is likely to look like ahead of next week’s FOMC monetary policy meeting. This puts the spotlight on US Jobless Claims figures on tap at 12:30 GMT, with a better-than-expected reading likely to renew profit-taking on QE-linkedbets and send the US Dollar higher against its major counterparts. That said, S&P 500 and FTSE 100 stock index futures are tracking higher, hinting at a “risk-on” session that may bode ill for the greenback.

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